Views on improving the integrity of global capital markets
24 June 2014

Self-Regulation in the Financial Markets


In the aftermath of the global financial crisis, many finance industry commentators have scrutinized the role of regulators in contributing to the crisis. Particular scrutiny has fallen on self-regulatory organizations (SROs). To help shape a better future for the financial industry, CFA Institute published a report last year entitled Self-Regulation in the Securities Markets: Transitions and New Possibilities. The report, which builds on earlier CFA Institute research on self-regulation, concluded:

We believe… that despite differences in the securities regulatory landscape that existed when they were first created, SROs and the market expertise they offer are now more important than ever. In fact, the ever-evolving complexities of the securities markets argue for more, rather than fewer, uses of SROs, if only to take advantage of their understanding of market practices.

In support of this conclusion, and in the interest of moving the SRO reform agenda forward, CFA Institute recently hosted an event in Washington DC under the auspices of our Future of Finance initiative, entitled “Self-Regulation in the Financial Markets: Exchange Issues, Market Structure, and Investor Protections.” A panel of current and former senior regulators, practitioners, and law professors — including the previous US Securities and Exchange Commission chairman, Mary Schapiro, pictured above — discussed a range of topics, from security exchange issues and market structure to investor protections, global financial market interconnections, and both the strengths of SROs and areas of needed reform.

All panelists, including those from traditional regulators and the legal profession, felt that SROs are an important part of the global regulatory framework. Still, the panelists identified many ongoing challenges. In opening remarks, for example, Schapiro contended that SROs can be a highly effective enforcer and complement the role of governments, especially in an environment where traditional regulators are underfunded. However, she argued, this is only true if the following conditions are met:

  • SROs are well-funded;
  • They are technologically advanced;
  • There is government oversight;
  • They are held accountable;
  • They act within their authority; and
  • They are structured to avoid conflicts of interest.

Highlights from each of the three panel sessions follow below:

1.  Global Overview: Role of Self-Regulation in Increasingly Interconnected and Complex Markets

Chris Brummer, professor of law at Georgetown University Law Center, argued that SROs face several challenges going forward, prompted by two key drivers of change:

  • Globalization: Interconnectivity changes the way financial markets must be regulated and the ways traditional regulators must coordinate with SROs. Globalization presents a number of challenges for the US, in particular, since the country is no longer a regulatory hegemon and must now engage in more coordination with European counterparts. Brummer pointed out that the tools being used today to coordinate global financial markets regulation are very different than what lawyers learned about in law school. Ad hoc, informal agreements; rulemaking; and codes of ethics are more commonly being relied upon as opposed to arduously negotiated international treaties.
  • Disintermediation: Disintermediation of financial markets spread via technology or new regulatory proposals is a root cause of many of the challenges that SROs must confront.

Brummer also highlighted the challenge to SROs posed by “regulatory arbitrage” when market participants shop for the most favorable jurisdictions. He specifically pointed to a white paper published by the Atlantic Council, entitled “The Dangers of Divergence,” which highlights the perils that regulatory divergence poses to financial stability, as an important resource.

Susan Wolburgh Jenah, president and CEO of the Investment Industry Regulatory Organization of Canada, Canada’s primary self-regulator, emphasized the need for SROs and formal regulators to have carefully delineated roles. “No one can know everything,” she cautioned. Wolburgh Jenah also emphasized that for SROs to be effective, they must manage inherent conflicts of interest; in other words, the trade association aspects of SROs must be separated from regulatory functions. She argued that such separation is especially important for establishing and maintaining public trust. Consistently good SRO governance is also key, she added, including independent board members and nominations that are handled by an independent board committee.

2. Exchange SROs: Meeting the Needs of Investors and the Financial Marketplace

Brooklyn Law School Professor Roberta Karmel, a former commissioner of the US Securities and Exchange Commission, argued that self-regulation at the stock exchange level only ever worked when fixed commissions served as the glue that held that regulatory framework together. In the 1970s, when price competition for commissions was permitted, the self-regulators were simply left in place and thus exchange SROs “have very little to do with self-regulation, and more to do with ‘more accessible’ regulation.”

A lack of “tire kicking” of SROs is what worries Richard G. Ketchum, chairman and CEO of the Financial Industry Regulatory Authority. Ketchum pointed out that private lawsuits seem to be the only form of checks and balances on securities exchange SROs.

“Even if we said exchanges are no longer SROs they will always have a responsibility to the public,” Mary Schapiro contended, “because the way orders interact is a matter of public interest.” She believes that communication between exchanges has gotten worse since they became public companies, however.

3. US System of Self-Regulation through SROs: Strengths and Areas for Reform

Daniel J. Roth, president and CEO of the National Futures Association (NFA) said that all of its rules are written with enforcement and consequences in mind. He stressed that this is critical to a proper regulatory framework, because if a regulation cannot be enforced, or if there are no consequences for violating rules, then there is no reason for the regulation. Roth thought that requiring futures market participants to be mandatory members of NFA was key to enforcement because membership revocation creates legitimate pain for wrongdoing.

Panelists at the event included:

  • David Blass: Chief Counsel, Division of Trading and Markets, US Securities and Exchange Commission
  • Chris Brummer: Professor of Law, Georgetown University Law Center
  • Daniel J. Roth: President and CEO, National Futures Association
  • Amarilis Sardenberg: Chair of the Board, BM&FBOVESPA Market Supervision
  • Mary Schapiro: Vice Chairman of the Advisory Board, Promontory Financial Group; Former Chairman of the US Securities and Exchange Commission; Former CEO of the Financial Industry Regulatory Authority; Former Chairman of the Commodity Futures Trading Commission
  • Susan Wolburgh Jenah: President and CEO, Investment Industry Regulatory Organization of Canada
  • Roberta Karmel: Centennial Professor of Law, Brooklyn Law School; Former Commissioner of the US Securities and Exchange Commission
  • Lynnette Kelly: Executive Director, Municipal Securities Rulemaking Board
  • Richard G. Ketchum: Chairman and CEO, Financial Industry Regulatory Authority

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Photo credit: LK Photos

About the Author(s)
Jason Voss, CFA

Jason Voss, CFA, tirelessly focuses on improving the ability of investors to better serve end clients. He is the author of the Foreword Reviews Business Book of the Year Finalist, The Intuitive Investor and the CEO of Active Investment Management (AIM) Consulting. Voss also sub-contracts for the well known firm, Focus Consulting Group. Previously, he was a portfolio manager at Davis Selected Advisers, L.P., where he co-managed the Davis Appreciation and Income Fund to noteworthy returns. Voss holds a BA in economics and an MBA in finance and accounting from the University of Colorado.

Ethics Statement

My statement of ethics is very simple, really: I treat others as I would like to be treated. In my opinion, all systems of ethics distill to this simple statement. If you believe I have deviated from this standard, I would love to hear from you: [email protected]

9 thoughts on “Self-Regulation in the Financial Markets”

  1. Mr. Voss, an all industry panel to debate the merits of self-regulation, is not very compelling, including the CFA message: “SROs and the market expertise they offer are now more important than ever.”

    Please be aware there are independent experts with the requisite market expertise to serve as independent watch-dogs for the benefit of society overall. From the 2008 financial crisis, to NFA/FINRA’S combined failure to take action against the blatant Peregrine fraud, to the SEC’s botched May 6th Flash Crash report, it is time to look at independent regulators, funded by financial sector levies As the June 24th Financial Times article discusses, “Brussels looks at levies to fund European watchdogs” reforms are desperately need. The end to self-regulation in the financial services industry is long overdue.

    1. Hello Susan,

      Thank you for your comments and for adding to the ongoing dialogue about self-regulation, and regulation, in general.

      With smiles,


      1. Thank you for your response and willingness to dialogue on the critical topic of self-regulation in the securities markets.

        We are all aware that self-regulation worked smoothly in the interbank markets for FX and OTC swaps for over 20 years. But then something changed. It is clear to see from Libor fixing, to FX scandals, to AIG speculating in OTC derivatives without adequate capital, self-regulation failed and has caused great harm to the US and global economy. Things are rotten in Denmark.

        How specifically is CFA, given its mission to protect the investor, dealing with the “revolving door” issue for self-regulation and the conflicts of interest that it presents? Over 90% of your panel either currently was employed by a regulator or previously worked for a regulator or industry lobbying firm.

        What is CFA’s purposed solution to this report by the Project on Government Oversight on “Dangerous Liaisons: Revolving Door at SEC Creates Risk of Regulatory Capture”.


        …Or as addressed here in Larry Doyle’s recent book, In Bed with Wall Street: The Conspiracy Crippling Our Economy”.

        I do not see the issue, of “regulatory capture” addressed in your report, nor at your conference.

        With CFA’s recommendation to continue self-regulation in the securities markets, what safeguards do you have in place to protect the investor, given the concerns in the two studies linked to, above?

        With Smiles to you,

        The Derivative Project

        1. Hello Susan,

          Thanks again for your engagement. Your questions are asking for official positions on these issues, so I think you may be disappointed to learn that I am simply the author of a journalistic piece. I attended the SRO event in DC and was capturing the nature of the conversation for those interested in the material. Thank you for your interest in my article and for the topic, too. Your passion and preferences shine through in your writing.

          With smiles,


          1. Sorry for my confusion. Please accept my apologies.

            Then as “Jason Voss, CFA, — a content director at CFA Institute” would it make sense as a “content director” and “journalist” to cover a broad spectrum of compelling issues to investors, such as the concept of regulatory capture discussed in the two links above? It would not have to be an official position, it is simply neutral content that represents all interested parties interests and perspective.

            Thank you again for your willingness to dialogue on this issue.

          2. Hello again Susan,

            I’m afraid my passion on this issue does not match your own. As Content Director my responsibility is to identify and curate compelling information for investors and where I see significant gaps in the information landscape to fill them; and all with a practitioner’s eye. I am certain that you feel there is a gap in the public discourse around how to improve the practice of finance and you have preferred cures for accomplishing this outcome. While I think the issues you have raised are important, the issues I think are of particular importance can be found on one of CFA Institute’s other venues, The Enterprising Investor.

            CFA Institute is a large global organization and we are large enough a community to encompass many view points and interests and thank you for sharing your view points.

            With smiles,


  2. Mark Jasayko, CFA says:

    Interesting that the Investment Industry Regulatory Organization of Canada (IIROC) had a panelist.

    In Canada, I need IIROC continuing education credits to maintain my portfolio manager license.

    I used to get credit for attending CFA conferences. However, IIROC has decided to no longer give credit.

    Not thrilled with my SRO about this. It can’t be because there is not enough relevant material.

  3. I’ll add my thanks to you Susan for your interest and comments. As head of global capital markets policy at CFA Institute, I’m aware of the Project on Government Oversight’s interesting work on the issue of regulatory capture at the SEC. While the issues raised are legitimate to be sure, they were outside of the scope of our Self Regulatory organization event in Washington, where we were examining the strengths and weaknesses of a regulatory regime that included SROs on a global basis. We have not pursued the issue of regulatory capture in depth in our work in the Capital Markets Policy group at CFA Institute to date, in part because we believe that we can be more effective with limited resources in offering investor perspectives on issues related to the current legislative and regulatory agendas post-crisis. Perhaps it is a symptom of a system tainted by regulatory capture that there is high value to independent voices such as ours being heard in the policy realm. We’ll give consideration to a deeper look at the issues you’ve raised, though, and I thank you for your interest.

  4. mischif says:

    they need to strongly regulate the banks and financial markets again to something like they were in the 50s.. but updated for todays greedy banking and financial industries. Self regulation.. What a joke.. thats like letting the fox guard the hen house.. the reason we are having these problems with the banks and markets.. is all the deregulation that happened from the early 70s thru the 90s and so on where they took nearly all the regs out and the banks and markets were having and are still having a greedy free for all.. this is the reason we are in the fix we are in.. and anyone who says it isn’t is either part of the problem.. or just plain stupid..

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